What’s Happening Today That No One Sees?

Amy and I watched The Big Short on Tuesday with my partner Jason and his wife Jenn. We were electrified as we walked out of the theater – all four of us loved it. Jason commented that it was a particularly impressive movie given the subject matter. I couldn’t stop saying “that’s the best explanation of what created the financial crisis that I’ve ever seen.”

I remember reading The Big Short in 2010 when it came out. I’m a huge Michael Lewis fan and gobbled it down in a day or two. As we walked to the parking lot, I commented that the big four actors (Gosling, Carell, Bale, and Pitt) in the movie totally nailed their roles. I particularly identified with Pitt’s character Ben Rickert (based on Ben Hockett) who lives in Boulder in the movie.

As we got into our car, Amy said, “What do you think is happening today that no one sees?” This was the underlying theme of the movie – there were some completely obvious things in hindsight going on at the time that no one saw, or wanted to see. A few did notice and made huge financial bets, in non-obvious ways – about what they saw and believed was going to happen. Their foresight and conviction paid off massively, but it scarred each of them in different ways that the movie dramatized extremely well.

I like some time to pass before I look at history. While some people are good at reflecting on the past year and looking forward to predict the next year (one of the best in the VC world is Fred Wilson – read his posts What Didn’t Happen, What Happened In 2015, and What Is Going To Happen In 2016), I’ve never been particularly good at a one year time frame. Instead, I generally like a ten year moving window to process things. So, the lens of 2005 (history) and 2025 (future) is the one I’m currently enjoying.

The Big Short is picking up major steam in 2005. The climax happens in 2008 and the denouement continues on until 2011. So, from a history window perspective, the time frame landed directly on my boundary. Subsequently, Amy and I went on a binge the past few days of other media around this, including the movie Too Big To Fail (which is really about what happened in the fall of 2008) and Inside Job (which covers a broader time range, but focused on 2005 – 2008).

As I sit here on January 2nd, 2016, I’m pondering “what is happening today that no one sees?” When I go back a decade, we were just making the decision not to raise another Mobius Venture Capital fund. My partners and I hadn’t yet created Foundry Group. Techstars didn’t exist. Venture Capital and entrepreneurship was dramatically out of favor. Early stage and seed capital was extremely difficult to find.

I remember having deep conviction that there was an enormous wave of technological innovation coming. I knew that many of the things that had been created in the Internet bubble were great ideas, but they were just – as Jerry Colonna and I like to say – a decade ahead of their time. Today, it’s pretty obvious that was correct. At the time, talking about this stuff was a conversation stopper of the sort that Michael Burry (played brilliantly by Christian Bale) seems to generate every time he talks to someone.

Unlike Mark Baum, who is based on Steve Eisman (and played even more brilliantly by Steve Carell), I’m not angry, cynical, and convinced the world is a giant, rigged, inside game. But I do believe that the vast majority of people have absolutely no idea what is really going on, especially those who are in the middle of whatever game they are playing.

While this comes out in The Big Short, it’s even more apparent when you watch (or read) Too Big To Fail. And, while watching Inside Job, you see people lying or trying to obscure the truth in almost every interview. You can’t fake reality – it always catches up with you.

In the mean time, I’m getting ready for the next season of Game of Thrones.

Back in 2005-2007 I was studying mathematical finance and the pricing of credit derivatives. I don’t think there’s anything necessarily nefarious about taking a counter position, or for that matter taking any position in a securitie’s direction. This is really about Quants versus bankers. Quants have the data and they code the pricing models. Of course they are going to win the street fight against the grin fuckers.

You know I’m not sure who won. If you were a banker pulling down $20mm+ bonuses and when things fell apart the result was you had to find a new job, i.e. you were not in a partnership, the stockholders lost the money. Who won?

I think the key is to be in the middle of the situation but yet be able to distance yourself from it.

For me I believe the belief that the U.S. Fed will not be able to set interest rates wherever they want is a ten year prediction.

I actually called fraternity brothers in 2006 who ran huge amounts of mortgage backed securities funds for major iBanks how to short. It was not easy for an individual.

I had just bought a new house. My wife wasn’t happy about our small house and used the example of employees that had bought huge houses. I knew their finances and wondered how they pulled it off, but I bought a big old historic house that was going into foreclosure for about 60% of ask. I then had to sell my house. I did in a week to a single mom school teacher for more than twice what I had paid less than 5 years before. Nothing wrong with that, I thought she either must have a big down payment or some other source of income. We got to the closing table (does anybody else find it bizarre you see the other person’s financing) and she commented she would finally be able to pay some credit card debt down with the 110% of value pick your payment negative amortization loan.

Ok, the ONLY chance this thing gets paid off is if housing prices continue to go up by 20% a year. I am actually pretty sick and just don’t want to see this and ask to get up from the table, my real estate agent says what is wrong? The lawyer comes out, and tries to re-assure me saying we do tons of these every day.

I call my fraternity brothers and they say well we package these up and sell them in tranches (yes I know remember I lived with you in NYC) but you can’t pick up a pile of dog turds put them in a bag and have some of them magically smell good.

Of course in two years she went into foreclosure and my old neighbors are still bitter with me.

Thank goodness for Michael Lewis who attacks anomalies and disconnects until he understands them, and then writes what he finds (and usually gets strongly attacked for doing so, but still does it). Most people today seem to live their lives with five to ten (or more) per day ‘doesn’t make sense’s but oh well’. You get a mass of this occurring and the ‘really really deep’ things completely go unnoticed (I am also guilty of this as I know I let a few go by daily to minimize the conflict associated with dealing with the contradiction). I agree — this movie was masterfully made — Brad Pitt produced it — I really enjoy the quality of almost everything’s he’s been involved with lately.

If you haven’t, I would strongly recommend reading Flash Boys, also by Michael Lewis. It explains how high-frequency trading preys on most investors and shows how the big banks stay a step ahead of regulation, constantly working in legal gray areas.

Yup, and that was deliberate … Plenty more coming on this topic in 2016.

Ralph Marx

Remember history does not repeat but rhymes. So, we are once again at massive levels of debt. Different sources this time. QE, meaning government debt. Look at student loans, auto loans. Just the Federal Govt, (meaning excluding state and local govts.) has debt equaling approximately $190,000 per TAXPAYER. There is no way that the majority of taxpayers, (ie, earning under $70K/yr) can pay off that debt without causing a severe economic slowdown. Meaning at some time that debt goes into default in mass quantities that would make the Cone heads look like they are eating like a bird. It is not that hard to see. What is hard is to believe it while so many are willing to just deny it.

Had “Too big to Fail” on my watchlist, will push that up a little higher. And having just watched the comedian Omid Jalali (on HBO) who does a great synopsis of why the vast majority in America especially have no reason to even want to know what’s going on… I think even if every banker stood outside of every branch for the next month and shouted it out, people would just pass by…